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Summer 2011


The Company Model of Anesthesia Services: Will Less Money Lead to Jail Time?

Mark F Weiss, Esq
Advisory Law Group, Los Angeles and Santa Barbara, CA

When asked why he robbed banks, Willie Sutton responded, “Because that’s where the money is.”

Ambulatory surgery center (“ASC”) owners, often surgeons, seek to obtain a share of anesthesia fees for the same reason. But instead of a gun, many are turning to a new model of money extraction, the so-called “company model.”

The abrupt bank robber approach to demanding a kickback is clearly illegal: “Bob, if you want to provide anesthesia at Greenacres ASC, you’ve got to pay us thirty cents on the referred dollar”.

Although there are far more ASC owners willing to take the bank robber approach than the industry likely will admit, some ASCs are choosing a slightly softer approach — forcing the anesthesiologists working independently at the ASC to instead work for an ASC affiliated entity that distributes a share of the anesthesia fees back to the ASC owners.

“Bob, if you want to provide anesthesia at Greenacres ASC, you’ve got to become an employee of our entity, Greenacres Anesthesia Services. We’ll even pay you commensurate with your production. In fact, we’ll pay you the lion’s share, seventy cents on the dollar!”

These entities are the “companies” of the so-called company model.

Of course, demanding 30% as a direct kickback (the bank robber approach) leads to the same economic effect as does forcing the anesthesiologists into an entity that “rewards” them with a 70% share (the company model).

But is the company model structure legal? That’s the $25,000 fine, plus five years in jail, plus exclusion from Medicare and Medicaid question. Of course, there are also Civil Monetary Penalties to consider, but you get the point.

Business Models

In order to better understand the issues of the company model, it’s helpful to consider the evolution of anesthesiologist-ASC business models.

Conventional Model

The conventional fee-for-service relationship between anesthesiologists and ASCs mirrors the conventional relationship between anesthesiologists and hospitals – the anesthesiologists, directly or through an anesthesiologist-owned entity, provide services to the patients of the ASC for their own account, in the manner of the surgeons performing their cases at the facility. In this relationship, the facility charges a facility fee and the physicians, both the surgeons and the anesthesiologists alike, charge their own, independent professional fees.

In many cases, the relationship between the anesthesiologists and the ASC takes on an additional factor or factors.

One or several of the anesthesiologists providing patient care services might assume other duties such as serving as the facility’s medical director. In compensation for those services, and to avoid a kickback (the provision of those services for free being an inducement to receive the referral of anesthesia cases), the ASC pays a fee, for example, a medical director stipend, in an amount equal to the duties’ fair market value.

In some relationships, the volume of cases or total reimbursement to be earned from providing coverage of the ASC’s anesthesia needs is not sufficient to attract or retain anesthesiologists. To obtain anesthesia coverage, the ASC pays a coverage stipend to the anesthesiologists or their professional entity in order to supplement their billings.

Over time, some ASC owners began to question the conventional model of their facility’s relationship with anesthesiologists.

For some it was an issue of economics. Many ASCs were located in markets that were already saturated. Many were located in areas that became economically depressed. Many, even in otherwise good locations, had cost structures that reduced, or even eliminated profitability.

For others it was a question of greed. Surgeon owners saw that anesthesiologists’ earnings from the surgery center could be greater than their own. Others viewed the right to provide anesthesia at their ASC as a “franchise” that had value and they wanted a share of it.

Captive Model

No matter the motivation, a second ASC-anesthesia business model took form, one that I refer to as the captive model. This model has the anesthesiologists working for the ASC as employees or as independent subcontractors – the defining characteristic being that, through one method or another, the ASC pays the anesthesiologists a fixed or production based sum. In some variants, the ASC bills the anesthesia fees under its own name; in others, it bills and collects under the name of the anesthesiologists – in any event, the anesthesia fees eventually find their way into the ASC’s bank account.

Company Model

For one or more reasons in any particular situation, the captive model began to morph into the company model. Some ASCs found that payors rejected their claims for anesthesia fees when billed under the ASC’s name. In states with prohibitions on the corporate practice of medicine, lay entity ASCs cannot provide medical services and therefore cannot employ the anesthesiologists or even subcontract with them under a financial structure in which the ASC participates. Some ASCs had neither of these problems but simply wanted to separate out, perhaps for management purposes or perhaps to disguise their real intent, the anesthesia coverage arrangement into a separate entity.

In some instances, it was not even the ASC itself that sought to change the relationship with their anesthesia providers by forming an anesthesia company owned by the ASC itself or by all of the ASC’s owners. Instead, it was a subset of the ASC’s owners, usually one or more surgeon-owners with referral clout, who sought to skim a bit of the profit cream off of the top of anesthesia services.

Key Compliance Issues

Stated in simplified terms, the federal antikickback statute (the “AKS”) prohibits remuneration, that is, the transfer of anything of value, for referrals. State laws, which differ in their treatment, scope and interpretation, generally contain similar provisions barring remuneration for referrals, sometimes expressed as antikickback or fee splitting prohibitions. Because of the variations in state laws, our focus will be on the federal concepts applicable to Medicare and Medicaid patients.

Courts have interpreted the AKS to apply notwithstanding the fact that there are many purposes for the arrangement that may be legitimate – the fact that one of the purposes is to obtain money for the referral of services or to induce further referrals is sufficient to trigger a violation of the law.

There are certain statutory and regulatory exceptions, known as “safe harbors,” that define permissible practices not subject to the antikickback statute because, in the opinion of the regulators, they would be unlikely to result in fraud or abuse. The failure to fit within a safe harbor does not mean that the arrangement violates the law, there’s just no free pass.

The question, then, for the company model is whether the arrangement violates the AKS.

Of course, the facts and circumstances of the structures vary and each potential deal must be analyzed carefully before it is structured. But it is possible to highlight the significant likelihood that many company model deals are illegal.

The Department of Health and Human Services’ Office of Inspector General (“OIG”) has issued two fraud alerts applicable to the analysis of company model deals, its 1989 Special Fraud Alert on Joint Venture Arrangements, which was republished in 1994 (the “Fraud Alert”), and its 2003 Special Advisory Bulletin on Contractual Joint Ventures (the “Advisory Bulletin”). The OIG uses the term “joint venture” to mean any arrangement, whether contractual or involving a new legal entity, between those in a position to refer business and those providing items or services for which Medicare or Medicaid pays.

Although the OIG withdrew its once proposed sham transactions rule, it made clear in issuing the safe harbor regulations and in other documents that compliance with both the form and the substance of a safe harbor is required in order for it to provide protection. In other words, even though planners generally work to fit a company model deal into the confines of a safe harbor, the OIG’s position is that if one underlying intent is to obtain a benefit for the referral of patients, the safe harbor would be unavailable and the AKS would be violated.

The Fraud Alert and The Advisory Bulletin

The Fraud Alert states:

“Under these suspect joint ventures, physicians may become investors in a newly-formed joint venture entity. The investors refer their patients to this new entity, and are paid by the entity in the form of ‘profit distributions.’ These subject joint ventures may be intended not so much to raise investment capital legitimately to start a business, but to lock up a stream of referrals from the physician investors and to compensate them indirectly for these referrals. Because physician investors can benefit financially from their referrals, unnecessary procedures and tests may be ordered or performed, resulting in unnecessary program expenditures.”

In describing examples of questionable features of suspect joint ventures, the Fraud Alert mentions, among others:

  • Investors are chosen because they are in a position to make referrals (e.g., the surgeon owners of the ASC who become the owners of the company model entity);
  • One of the parties may be an ongoing entity already engaged in a particular line of business (e.g., the anesthesiologists); and
  • The referring physician’s investment may be disproportionately small and the returns on investment may be disproportionately large when compared to a typical investment in a new business enterprise (e.g., the company model, which requires only nominal start up capital).

It’s obvious that the features of a company model include many of those stated by the OIG in the Fraud Alert to be questionable.

The Advisory Bulletin issued by the OIG in 2003 sheds even more light on the analysis of company model structures. It focuses on questionable contractual arrangements in which a healthcare provider in an initial line of business, termed the “Owner,” expands into a related healthcare business by contracting with an existing provider of the related item or service, the “Manager/ Supplier,” to provide the new item or service to the Owner’s existing patient population. Note that the term “existing provider” as used in the Advisory Bulletin is not limited to situations in which the specific anesthesiologists have an existing relationship with the ASC at the time the company model joint venture is formed.

The Advisory Bulletin describes some of the typical common elements of these problematic structures. (See the sidebar on page 12.) They appear almost as if meant to describe a company model structure in which the ASC or some or all of its sur-geon owners form the company solely for the purpose of providing anesthesia ser-vices to the ASC: Little capital is required. The anesthesiologists, not the owners, provide the actual services and, absent their engagement by the company, they would be providing anesthesia services for their own account. The company’s owners capture a share of the anesthesia revenue. And, importantly, the more cases the ASC or its surgeons refer to the company, the more those company owners make.

The Advisory Bulletin states that despite attempting to fit the contracts creating these joint venture relation- ships into one or more safe harbors, the OIG views the discount given within the joint venture’s common business enterprise (e.g., the anesthesiologists agree to be paid less by the “company” than they would receive if they billed independent of the joint venture) as not qualifying for the safe harbor applicable to discounts.

Even if the contracts could fit within one or more safe harbors, the Advisory Bulletin states that they would protect only the payments from the Owner to the Manager/Supplier for actual services rendered, not the “payment” from the Manager/Supplier back to the Owner in the form of its agreement to provide services to the joint venture for less than the available reimbursement, that is, the “discount” given within the joint venture.

Again, the failure to qualify for safe harbor protection does not mean that a venture is illegal. It does mean that it might receive additional scrutiny that could lead to prosecution.

In 2009, the ASA requested that the OIG issue a Special Advisory Bulletin on the company model. The ASA renewed that request in June 2010. Although the OIG has acknowledged the initial ASA request, as of this writing it has yet to act.

The Bottom Line

The bottom line is that company model ventures are fraught with kickback danger for all parties involved. Although it may be possible that a particular instance qualifies for safe harbor protection, the OIG’s position as expressed in both the Fraud Alert and the Advisory Bulletin demonstrates that these arrangements are subject to special scrutiny.

As the government’s focus on weeding out healthcare fraud intensifies, the need to fully understand the risks grows. Each situation must be analyzed carefully as there is a high chance of an AKS violation leading to criminal fines, civil penalties, exclusion as a provider and even imprisonment.

...And An Important Post Script

The Fraud Alert and the Advisory Bulletin make clear that there is no requirement that a fraudulent joint venture be operated through a new legal entity. Captive model structures in which anesthesiologists work directly for the ASC itself, whether as employees or as independent subcontractors, are joint ventures.

The financial relationships within those captive model joint ventures are as equally suspect as those within company model joint ventures, a fact most often glossed over.

In fact, the company model format may simply be a slightly slicker variation of the captive model – slicker because it provides the ASC with an alternative way to bill for anesthesia professional fees and, in a state with a strong prohibition on the corporate practice of medicine, creates a medical entity to hold the anesthesia business. Lastly, in other instances, the company model is just a captive model with stickier fingers – instead of the ASC itself, or all of the ASC’s owners, sharing in the anesthesiologists’ pie, a subset of the surgeon owners take that slice for themselves.

Viewed in the light, the captive model and the company model are two sides of the same coin, one that the surgeon owners of ASCs are two sides of the same coin, one that the surgeon owners of ASCs are attempting to put into their pocket. Both models pose significant AKS dangers.


Mark F. Weiss, Esq., is an attorney who specializes in the business and legal issues affecting anesthesia and other physician groups. He holds an appointment as Clinical Assistant Professor of Anesthesiology at USC’s Keck School of Medicine and practices nationally with the Advisory Law Group, a firm with offices in Los Angeles and Santa Barbara, Calif. Mr. Weiss provides complimentary educational materials to our readers at www.advisorylawgroup.com. He can be reached by email at markweiss@advisorylawgroup.com.